As we wrote here yesterday, FX reserves at global central banks may be starting to rise again. That's a consequence of a pick up in portfolio investment flows in recent weeks and is likely to continue after the U.S. Fed's announcement of its QE3 money-printing programme.

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Amid all the furious G7 money printing of recent years, Brazil was the first to sound the air raid siren in the "international currency war" back in 2010 and it continues to cry foul over the past week. With its finance ministry issuing fresh warnings last night over hot-money flows being dropped by western economies on its unsuspecting exporters via currency speculation, Brazil's central bank then set off its own defensive anti aircraft battery with a surprisingly deep interest rate cut late Wednesday. Having tried everything from taxes on hot foreign inflows to currency market intervention, they are braced for a long war and there's little sign of the flood of cheap money from the United States, Europe and Japan ending anytime soon. So, if you can't beat them, do you simply join them?

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Emerging central banks that sold billions of dollars over the summer in defence of their currencies might soon be forced to do the opposite. Japan's massive currency intervention on Monday knocked the yen substantially lower not only versus the dollar but also against other Asian currencies. The action is unlikely to sit well with other central banks struggling to boost economic growth and raises the prospect of a fresh round of tit-for-tat currency depreciations. Already on Monday, central banks from South Korea and Singapore were suspected of wading into currency markets to buy dollars and push down their currencies which have recovered strongly from September's selloff. The won for instance is up 6.9 percent in October against the dollar -- its biggest monthly gain since April 2009. The Singapore dollar is up 4.5 percent, the result of a huge improvement in risk appetite.

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In less than two months, Turkey will mark the first anniversary of the start of an unusual monetary policy experiment, and it may well do so by calling it off. The experiment hinged on cutting interest rates while raising banks' reserve ratio requirements, and as recently as August, the central bank was hoping it would be able to slow a local credit boom a bit but still protect exports by keeping the currency cheap. Instead, an investor exodus from emerging markets has put the lira to the sword, fuelling at one point a 20 percent collapse in its value against the dollar. That has forced the central bank to roll back some of the reserve ratio hikes and last week it jacked up overnight lending rates in an attempt to boost the currency. It has also sold vast quantities of dollars and is promising to unveil more measures on Wednesday.

from MacroScope:

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Gary Smith, head of central banks, supranational institutions and sovereign wealth funds at BNP Paribas Investment Partners, has written a special guest blog for Macroscope in which he argues that central banks should consider ways to hedge their FX reserves against the crisis.

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BOND YIELDS
- Nominal bond yields have risen across the curve, while term premiums and fixed income volatility are higher in an environment of uncertainty about how central banks will exit from quantitative easing policies once recovery takes hold. Bonds have turned into the worst-performing asset class this year according to Citi and none of the factors which markets have blamed for this are about to disappear. Curve steepening seen in April/May has started to reverse and whether it continues is being viewed as a more open question than whether yields head higher still.

from MacroScope:

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All this talk about ditching the dollar as world reserve currency may be irrelevant -- central banks are already walking away. The latest International Monetary Fund figures show dollar share of world FX reserves falling to 64.0 percent in last year's fourth quarter from 64.4 percent the previous quarter. Doesn't sound much, but at that pace dollar is less than half of world reserves in less than a decade. years. It was the same for once mighty sterling. The pound's share dropped to 4 percent from 4.5 percent. The euro rose 1 percentage point to 26.5 percent.